The tax bill will boost the economy. The biggest impact will be the gradual improvement in economic growth year after year. A small increment added to our recent growth rates would be inconsequential in any one year, but the increments will cumulate and even compound. Twenty years from now, the difference will be significant.
WASHINGTON, DC – DECEMBER 19: Speaker of the House Paul Ryan following passage of the Tax Cuts and Jobs Act . (Photo by Chip Somodevilla/Getty Images)
Plenty of newspaper reports show how much more or less you will pay in taxes. For the bill's impact on the economy, ignore who wins and who loses. Instead, focus on incentives and disincentives.
The change in corporate tax rates is the big deal here. Our highest corporate tax rates are very high relative to other major economies. The “effective tax rates,” which factor in deductions, exemptions and tax credits, are much lower. The important issue is this: when a company makes a capital investment in order to earn more profits, at what rate will those additional profits be taxed? The answer is usually at the top statutory tax rate. The deductions and exemptions have already been figured in, so the extra income is usually taxed at the top rate. Bringing that top rate down is very valuable to capital spending.
The corporate tax cut affects C corporations, big businesses mostly, but there are also provisions for the small and medium-size companies that are mostly organized as pass-throughs. These are S corporations, limited liability companies or sole proprietorships. They will benefit, but not as much as the C corporations.
Capital spending is where we'll first see the tax bill's benefits. Unlike some of the bill's supporters, I do not expect a huge rush to capital spending. These expenditures take time and planning, especially for big-ticket items. Also, it doesn't make sense to buy machinery willy-nilly. The business still needs to ensure that there will be a market for its products, and that its total costs will be less than the prices it can charge. Over time, however, investment in business will increase.
